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Market to Remain Tentative

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A strong retail sales reading, weak economic growth in Germany, and reassuring words out of Ben Bernanke Monday evening provide the backdrop for today’s trading action. But the market’s mood is expected to be tentative ahead of big bank earnings reports the rest of this week and rising rhetoric about the debt ceiling issue.

The December Retail Sales data this morning came in better than expected, which confirms what consumer confidence data had already been indicating: that the ‘Fiscal Cliff’ debate that month didn’t have any negative effect on household spending during the holidays. Both the ‘headline’ and the ex-autos growth pace came in better than expected, while the prior month’s ex-autos growth number was revised a shade lower.

Retail Sales serve as a proxy for consumer spending, which is the mainstay of the U.S. economy. While consumer spending has held up decently in recent quarters, the concern is that the end of the payroll tax relief as a result of the partial ‘Fiscal Cliff’ resolution will bring down spending levels this year.

The fourth quarter GDP report coming out later this month is expected to show the U.S. economy expanding at less than half of the third quarter’s +3.1% pace. Today’s Retail Sales report should provide some comfort on that front. Elsewhere on the economic front, the New York Fed's Empire State index for January remained in the negative territory, indicating that the factory sector still remains problematic.

While U.S. economic growth has been lackluster, the situation across the pond has been outright ugly. Today’s report shows that even Germany, the Euro-zone’s strongest economy, endured negative economic growth in the final quarter of 2012. The German GDP contraction in the fourth quarter was expected, but the extent of the contraction was not.

The German economy contracted at roughly double the pace of what consensus was expecting. Many in the market do not expect the German economy to remain in the negative territory for long, with consensus estimates for the first quarter of 2013 showing positive GDP growth.

But the worrying part about Germany is that business confidence remains low, which is weighing on business investments. In fact, it was weak business spending that produced the negative GDP read in the fourth quarter, offsetting positive trade and spending by consumers and the government. The concern is that Germany may not be able to stay immune from the weak economic forces swirling all around them.

In corporate news, we have a solid earnings beat from homebuilder Lennar (LEN - Analyst Report), while Forest Labs came short of expectations. The market will likely be not much enthusiastic about the guidance that came out Lululemon Athletica (LULU - Analyst Report), the yoga pants maker, after the close on Monday.

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